Nasscom may cut growth target for software services again

Nasscom may forecast lower growth for the software services sector in the next financial year as the it grapples with macroeconomic uncertainty and currency volatility.Jochelle Mendonca&Neha Alawadhi | ET Bureau | Updated: February 03, 2016, 09:02 IST

IT industry body Nasscom may forecast lower growth for the software services sector in the next financial year as the industry grapples with increasing macroeconomic uncertainty and currency volatility.

Growth issues in the US, especially in areas affected by plunging oil prices, and ambiguity caused by the plummeting Chinese markets are some of the reasons sparking caution, people with knowledge of Nasscom’s deliberations said.

“Most companies have been cautious when giving Nasscom an estimate for next year’s growth. There is weakness in energy, there are job cuts in the commodities sector and then just look at China. I think it will be a lower target,” a top executive with an Indian IT company told ET, declining to be identified because the discussions are confidential.

The National Association of Software and Services Companies will unveil its target for 2016-17 in New Delhi on Thursday. The industry body declined to comment for this story.

“The average expectation is lower. There is so much more uncertainty going into next year. Oil is not recovering. There are even some concerns about a possible growth slowdown in the US. It makes sense to be cautious. You don’t want to come back and cut the target later,” an executive with another IT company said, asking not to be identified. The person said the deliberations were centred on maintaining the current rate or cutting it marginally.

If the target is cut, it will be the second year in a row that Nasscom would have reduced the growth rate forecast. The industry body, which had targeted 13-15% growth in FY15, lowered it to 12-14% in FY16.

The current financial year is expected to be the worst on record for growth since the Lehman crisis in 2008, ET reported previously. The industry may meet the Nasscom target only if currency fluctuations are kept out of consideration, a change brought in this year.

Nasscom’s senior VP Sangeeta Gupta told ET last week that in times of massive currency volatility, it made sense to rejig the target to constant currency. Some analysts believe that growth could slow for the next few years as the IT market shifts to cloud-based and as-a-service delivery models.

We held the view that industry would post an 8%-10% revenue CAGR in dollar terms over FY15-FY18E, which we felt was 200bps-400bps below street estimate,” Girish Pai, an analyst with Nirmal Bang, said in a note dated January 13. Analysts also attribute a lower target to the high base effect.

“(The fall in next year’s target) will not be a surprise. The industry is undergoing a transition and the economic situation across Europe and other economies is also not that great. The base is pretty high,” Dipen Shah, senior vice president at Kotak Securities, told ET.

Shah added that as a result of the larger base of $110 billion, incremental revenue coming in would be similar, even though the growth target was lower.

“On a $90 billion base, growth was 14%, so incremental revenue was about $13 billion. Now on a $110 billion, probably it will be 11%, which is again $13 billion,” he said.